A Healthier Kellogg on the Horizon

Erin Lash: Much angst within the consumer product space over the last several years has centered on an inability of firms to generate sustainable top-line growth. However, many operators within the space have begun to reverse course, posting low- to mid-single-digit organic sales gains in the most recent period. We attribute this improvement to efforts to increase the agility in their innovation pipelines and bring decision-making for new products down closer to the end consumer.

However, Kellogg has been the exception. While Kellogg continues to post improving top-line performance of nearly 3% organic sales growth in the most recent period, the market continues to punish the name, given continued erosion in its margins. However, we attribute the margin shortfalls to investments the firm is making, both behind its brands as well as behind its manufacturing footprint, particularly in emerging and developing markets, which we think should support the long-term health of the business, even at the expense of near-term profits.

As such, we view the nearly 20% discount relative to our $78 fair value estimate as quite attractive at present, particularly given shares also offer a 3.5% dividend yield. In this vein, we think investors should stock up on this wide-moat name.